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Key Issues for Seawater Desalination in California: Cost and Financing Summary It is not yet clear whether the Carlsbad desalination project will proceed and what lessons can be drawn from the project. However, the project raises several issues that should be addressed before the project is approved, in particular: • The project was negotiated in a non-competitive environment, which raises concerns about whether the best project was selected, especially as it relates to the cost, design, and operation of the plant. • Demand risk is a major concern for the project. Alternative supplies and conservation and efficiency improvements are available at lower cost than the desalination project. • The take-or-pay contract establishes a high minimum commitment to purchase water. This would prevent the Water Authority from pursuing cheaper water alternatives, as they become available. • The Water Authority should consider a lower minimum commitment, which would allow them the flexibility to reduce plant output and capture potentially significant financial savings from lower O&M expenses. Conclusions Economics – including both the cost of the water produced and the complex financial arrangements needed to develop a project – are important factors that will determine the ultimate success and extent of desalination in California. In this report, the second in a series on key issues for seawater desalination in the state, we provide detailed information on the cost of seawater desalination projects, how they are financed, and some of the risks associated with these projects. How Much Does Desalination Cost? Our analysis finds that the cost to produce water from a desalination plant is highly variable. Recent estimates for plants proposed in California range from $1,900 to more than $3,000 per acre-foot ($1.54 - $2.43 per m 3 ). While the cost of seawater desalination has declined considerably over the past 20 years, desalination costs remain high and there are unlikely to be any major cost breakthroughs in the near- to mid-term. Indeed, desalination costs may increase in response to rising energy prices. The public and decision-makers must exercise caution when comparing cost estimates for different seawater desalination projects. In many cases, costs are reported in ways that are not directly comparable. For example, some report the cost of the desalination plant alone, while others include the additional infrastructure, e.g., conveyance pipelines, needed to integrate the desalination plant into the rest of the water system. Some estimates include the cost to finance the project, while others do not. Even when there is an apples-to-apples comparison, there are a number of site- and project-specific factors that make cost comparisons difficult, such as energy, land, and labor costs. 40
Key Issues for Seawater Desalination in California: Cost and Financing Furthermore, costs associated with wastewater conveyance and treatment are often excluded from desalination cost comparisons. The introduction of a new source of water increases the amount of wastewater that must be collected, treated, and disposed. Some communities may have adequate wastewater treatment capacity and the additional costs would simply be the variable O&M costs associated with that treatment. In other communities, however, wastewater treatment capacity may need to be expanded, which represents an additional, and in some cases significant, capital cost to the community. While these costs would apply to all of the water supply projects under consideration to meet demand, these costs would not be incurred if water demand was met through water conservation and efficiency improvements. How Are Seawater Desalination Projects Financed? The construction of a desalination plant is expensive and requires considerable up-front capital investment. To cover these costs, project developers often rely heavily on debt financing, which involves borrowing money from a lender with the intent of repaying the principal of that debt and interest. Although still relatively uncommon within the water sector, project developers are also turning to private equity financing – whereby an investor provides capital for the project in exchange for partial ownership of the desalination plant. For most of the proposed projects in California, the finance mechanism has not yet been determined. Desalination projects that are being developed solely by public water agencies will likely use municipal revenue bonds or other conventional financing methods. Additional support may be provided through government grant and loan programs. Nine of the proposed plants in California, however, may be entirely or partially financed and owned by private companies, and these projects will likely use some combination of debt financing, especially tax-exempt private-activity bonds, and private equity. These public-private partnerships can allow for a mechanism to attract private investment and share some of the risks associated with a project. One of the possible drawbacks in private sector financing, however, is the high cost of private capital, which is reflected in the price of desalinated water. Proponents of this approach, however, argue that the higher costs are offset by lower risk for the water provider, higher efficiency of the contractor, and technology performance guarantees. What Are Some of the Risks Associated with Seawater Desalination Projects? There are several risks associated with seawater desalination projects that can affect the cost of the project, ability to attract financing, and overall viability of the project. Many of these risks are not unique to seawater desalination projects; rather they apply broadly to all major infrastructure projects. These include risks associated with permitting, construction, operations, and changes in law. 41
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997.4 KB - San Francisco Bay Area Independent Media Center

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